The Modi Effect

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The Modi Effect - Gujarat's power sector turnaround story

byNarendra Modi For PM on Wednesday, February 1, 2012 at 4:23pm

When Narendra Damodardas Modi took over as chief minister of Gujarat in October 2001, he

found the state's power situation grim. The Gujarat State Electricity Board, or GSEB, had posteda loss of Rs 2,246 crore for 2000/01, on revenues of Rs 6,280 crore. Interest costs alone were Rs

1,227 crore. Transmission and distribution, or T&D, losses were a substantial 35.27 per cent, andload shedding was frequent. GSEB had no funds to add generation capacity on its own, nor was

it able to persuade the private sector to invest.

Reforming the GSEB, thus, became one of Modi's top priorities. "He feared that a

bankrupt power utility could derail his vision for the state," says Saurabh Patel, Gujarat's

Industries and Power Minister, then as now. "He knew electricity is crucial for growth."

Modi's first step was to identify a bureaucrat capable of taking onthe enormous challenge. He chose Manjula Subramaniam, a Gujarat cadre officer, who had

been joint secretary in the prime minister's office from 1993 to 1998, playing a key role in thecountry's liberalisation, and appointed her Chairperson of GSEB and Principal Secretary, Energy

and Power.

Subramaniam quickly realised that GSEB was too large an entity to be managed effectively. Butshe did not rush into unbundling it. Instead, she initially concentrated on two areas: bolstering

the power utility's finances and building employee morale. Discovering that GSEB had securedloans at interest rates of 18 per cent or more, she sought debt restructuring, convincing banks and

financial institutions to lower their rates, which resulted in savings of Rs 500 crore in 2002/03.


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Her next step was more radical. Rarely before had electricity boards renegotiated power purchaseagreements, or PPAs, already signed with private players. But having examined the PPAs her

board had entered into, Subramaniam felt the heat rate - a measure of generator efficiency - had

been inflated by the power suppliers, who were consequently charging more than they shouldhave.

Though the private players initially resisted, the government-constituted committee set up for the

process stood firm, and ultimately, after more than 18 months of hard bargaining, got the rateslowered, leading to a furthersaving of Rs 675 crore in 2002/03 and Rs 1,000 crore in 2003/04.

Simultaneously, Modi's government began plugging the leakages in distribution. Power thefts inGujarat then ranged between 20 per cent in urban areas and 70 per cent in rural regions. Itpassed a law against power thefts and set up five police stations across the state, solely to

nab such thieves. Stringent action began against those who ran up large power bill arrears,including disconnecting their supply.

Unmetered power supply, which some rural areas were getting was stopped altogether, withGSEB entering into a structural loan re-adjustment with Asian Development Bank to fund the

installing of meters.

Subramaniam also found that many employees, disturbed by widespread talk of power reforms,

feared for their jobs, and were feeling somewhat alienated from GSEB. She appointed aconsultant to suggest ways to win back their loyalties.

From mid-2002, armed with the consultant's suggestions, the board began its special effort to

reach out to employees. It started training programmes at all levels to reassure them that while

people may be redeployed, no one would be laid off. Senior officials increased their interactionswith the staff, including holding 'town hall' meetings where they shared details of the board'sfinancial position and encouraged employees to ask questions. An internal newsletter was also

started.


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Once assured of retaining their jobs, the employees themselves began discussing possiblereforms. A 'reforms progress management group', comprising GSEB employees, was also set up.

It was now time for the unbundling. In May 2003, the Gujarat government passed theGujarat Electricity Industry (Reform and Reorganisation) Act, which divided the GSEBinto a holding company, a power generation company, a power transmission company and

four distribution companies. This enabled better management and more efficient

operations.

Another key reform was the separation of the feeder line that supplied power to the rural areasinto two: one to supply power for agricultural needs and other for household and other needs.

This was part of the Jyoti Gram Yojna, a scheme Modi announced in 2003 to supply

round-theclock power to villages.

"A single feeder has its limitations," says Mukesh Puri, Managing Director of the holdingcompany, Gujarat Urja Vikas Nigam. "The villages got power for only 12 to 15 hours a day,

often of poor quality and at odd hours."

Since the tariff for power used for agricultural purposes was much lower, many used this

subsidised supply for their household needs as well, resulting in huge losses for GSEB.

"The chief minister asked us to have separate feeders, which was a path-breaking step no statehad attempted before," Puri adds, "The results were good." Though many rural residents had

higher power bills to pay than in the past, they cooperated with the government, once they foundthey were assured of uninterrupted, better quality power.

A study by Indian Institute of Management, Ahmedabad has estimated that the projectsaved the state capital expenditure of around Rs 23,000 crore, or about 5,000 megawatts, or

MW.

The Modi government has also taken scrupulous care to ensure that the state electricity

regulator - unlike in most states - remains truly independent of political pressures . The


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regulator has, thus, been able to revise power tariffs every year, which ensured the state bridgedthe gap between the average cost of supply and what users paid for it.

The result? The state electricity board posted its first profit of Rs 203 crore - after tax - in2005/06. By 2010/11, net profit had risen to Rs 533 crore, while T&D losses had fallen to20.13 per cent. Tariff collection efficiency is close to 100 per cent . Private players, once

reluctant to invest in Gujarat's power generation, are now rushing in: of the power plants with atotal installed capacity of 16,945 MW coming up in the state, 6,864 MW - or roughly, a

third - is by the private sector. "Abundant power is a major USP of our state today," saysminister Patel.

A few worries remain. Though T&D losses have fallen, they are still higher than those of the

southern states such as Andhra Pradesh, Karnataka, and Tamil Nadu. The cost of power inGujarat has been traditionally high, and remains so.

"Our share of hydel power is very low and our power plants are very far away from coalfields,"

says Puri. "At times the cost of transporting coal equals the cost of the coal." A sizeableproportion of its power - around 29 per cent - also comes from gas-based plants, and the high

cost of gas has forced scaling down the operations of some of them.

But ultimately, it is a remarkable transformation for a state which was power deficient barely adecade ago, but now has a surplus of 2,114 MW and a vibrant energy sector.

The Gujarat experience clearly shows what strong political will to reform the electricity sectorcan achieve. Of the many innovations the state tried, the separation of feeders for supply towards

agricultural use was a master stroke. It not only helped farmers get quality power at fixed timebut also ensured that leakages were curtailed. It enabled measurement of the power used for

agricultural purposes as well, so as to arrive at the exact quantum of subsidy that needs to be

reimbursed to the distribution companies. Today feeder separation is being adopted by manyothers states.

Also the manner in which pilferage was tackled is interesting. I know how the CEO of a state-run

distribution company that supplied to one half of a particular city in Gujarat was fullyempowered to take all measures to match the low T&D losses of a private sector company that


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supplied to the other half of the city. The state has also been proactive in promoting renewableenergy. By offering to buy solar power at `12.50 per unit, the state will soon see over 350 MW of

power from solar energy.

It is true that the cost of electricity is higher in Gujarat but that is because the state's electricityregulator has proactively raised prices as costs of generation rose. This makes sense in the long

term.

As can be seen, companies foraying into Gujarat are not too concerned about paying a couple of

rupees more for consistent and good quality power. The challenge that the state faces is on theT&D loss front where there is still scope for reduction by four percentage points or so. More

needs to done there.

- Kirit S. Parikh , Ex-member of Planning Commission, and Chairman, Integrated

Research and Action for Development

Commercial losses and poor health are hallmarks of the power utilities of states in India. Thedistribution companies, or discoms, incurred an accumulated loss of Rs 75,000 crore in 2008/09

which further rose to Rs 106,341 crore in 2009/10. The share of costs recovered has deterioratedfrom 82.5 per cent in 2006/07 to 77 per cent in 2008/09. The dismal state of affairs is due to

continued political pressure opposing reduction in subsidies and efforts to lower distribution

losses. Most state utilities have not revised tariffs for a number of years. The state regulatorycommissions are independent only on paper and are subject to political compulsions.

Against this backdrop, the performance of Gujarat in turning around the GSEB is noteworthy.

Timely tariff revisions have made the sector viable enabling the state to set up adequategeneration capacity. The state is in a supply easy position with which it has been able to meet the

requirements of the farm sector. It has also been able to meet the subsidy requirements ofdiscoms on this account, which many states have not been able to do.

Gujarat has been able to achieve the growth with a mix of steps that have both commercial and

social overtones, with stress on credible implementation and realising rational user charges. Thepolitical will along with the turnaround strategy has produced the expected benefits. The

worrying signs are high T&D losses, which are still over 20 per cent, and inadequatetransmission links. These need to be fixed. The demand for revision of tariffs of utilities, which

are using imported coal and have increased costs, if not heeded, could derail the capacity


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addition plans. However, the track record indicates that Gujarat has the ability to attend to theconcerns.

-V

. Raghuraman , former Principal Analyst, Energy, Confederation of Indian Industry

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The Modi Effect